If you are a 1970s music fan like me, you would remember these famous words from the chorus of the Little River Band (LRB) song.
Goodness knows how many times I have heard the above-mentioned LRB song, but with all the commentary taking place in the mainstream and social media outlets today about extending Covid payments to people who don’t have sick leave, and also about PM Albanese’s work travel, the chorus to the LRB song is ringing in my ears at 10.21pm tonight as I commence drafting my post.
Let me if I may dispose of this ridiculous sniping about Mr. Albanese’s travel, which save for France and Indonesia probably would have been the former PM Morrison’s travel schedule as well had he won the election.
The Quad Meeting had been scheduled to be held in Japan for the week immediately after the day of the election long before election day. Mr. Albanese’s next trip to Indonesia was essential for two reasons. Not only was the trip to conduct the usual diplomacy of a new Australian PM visiting our important northern neighbour, but also it was required to smooth over relations with Indonesia which the Morrison government had strained with them because of their failure to consult with them over the AUKUS pact.
Indeed, it was also because of the shambles Mr. Morrison had personally caused in the breakdown of relations with France (by the way, France are our most important Northern Hemisphere ally when it comes to the Pacific as it holds three territories in the South Pacific which are New Caledonia, Wallis and Futuna, and French Polynesia and those countries account for about one third of the Pacific Islands’ combined exclusive economic zone) that Mr. Albanese had to travel to that country after the NATO meeting (the first invitation ever extended to an Australian PM) to smooth over the relationship with President Macron before his secret trip into Ukraine.
The improvement of relations with France has further assisted Australia by regenerating the free trade deal with the European Union which had “essentially stalled” amid the tensions with France and international criticism of Australia’s climate change stance. Finally, the Pacific Nations forum had to be attended at by our PM, particularly in circumstances whereby China is expanding its influence in the region. By attending the Pacific Nations meeting Mr. Albanese was able to secure the Solomon Island’s agreement they would not allow China to establish a military base there, and that Australia remained their country of choice for security matters.
The urgent resetting of these afore-mentioned international relations were essential domestic issues for this country, as these relationships affect our trade and security. Even relations with China have thawed to a degree, and all this foreign affairs urgent work has been performed within seven weeks of the new Albanese government being sworn in. So when a half-smart journalist like Samantha Maiden makes some side of mouth comment about the PM wearing his floral shirt this week, send a note back to Sam on social media to say that it was for work and not for a secret holiday in Hawaii (and by the way, you can quote me if you like).
Now I move onto the more complex issue of extending Covid leave pay entitlements for people without sick leave. This problem is not easily resolved by signing a cheque, as our economic position is far worse than what we were told before the 2022 Federal Election was called.
First of all, the budget was not in the state the former treasurer Mr. Frydenberg had told us it was in on the night of the budget. Not long after the Federal Election, indeed on 25 May 2022 the treasurer Dr. Chalmers met with Treasury officials. What Dr. Chalmers discovered is the Albanese government has inherited a “dire” budget situation with a deficit that could blow out further due to soaring inflation, and Dr. Chalmers accused the Coalition of not disclosing pressures on the budget, revealed in Treasury briefings since Labor’s election win on Saturday, 21 May 2022. Dr. Chalmers told reporters on 25 May 2022 that:
“The defining challenges in our economy are skyrocketing inflation, rising interest rates, a fall in real wages and not having anywhere near enough to show for a budget which is absolutely heaving with a trillion dollars in Liberal party debt.”
The next issue about the large national debt the Morrison government has left behind raises the economic issue of concern of crowding. In 2018 the International Monetary Fund (IMF) working paper outlined the critical factors determining a country’s maximum sustainable debt level is the difference between its future nominal interest rate and its growth in economic activity. When the growth in cost of servicing debt (i.e. the interest) is higher than the rate of economic growth, then the debt will not be sustainable, as the economy is not growing faster than the debt servicing costs.
The RBA in May 2021 said about its 2021-22 and 2022-23 forecasts economic growth would be 4% in 2021-22 and 3% in the 2022-23. The RBA forecast in 2021 was that inflation would remain subdued in the medium term (Source: Australian Parliament House (APH) paper ‘Commonwealth debt’, written by Rob Dossor). I can hear the bells ringing on the famous gameshow as I type away here, “Knoll Knoll”. Forecasts by the RBA in May 2021 about economic growth in 2021-22 (4%) and 2022-23 (3%) were also wrong. In its February 2022 economic update the RBA stated:
“GDP is forecast to have grown by 5 per cent over 2021, and to grow by around 4¼ per cent over 2022 and 2 per cent over 2023. The unemployment rate is forecast to decline gradually over the forecast period, to 3¾ per cent by the end of 2023 (Table 5.1). Inflation picked up in the second half of 2021, by more than expected at the time of the November Statement (you’re not kidding), and the outlook for inflation has been revised higher. Consumer price inflation in the December quarter was 1.3 per cent and 3½ per cent over the year, led by increases in the prices of new dwellings, durable goods and fuel. Underlying inflation has also picked up in recent quarters and is forecast to increase further to 3¼ per cent in mid-2022, largely reflecting upstream cost pressures amid strong demand in housing construction and the durables goods sector. Further out, the drivers of inflation are anticipated to shift, with a steady pick-up in labour costs in response to strong labour market conditions forecast to sustain inflation in the top half of the 2 to 3 per cent target range.”
In its May 2002 economic update the RBA made the following statement about economic growth and inflation:
“A strong expansion in the Australian economy is underway. This is expected to continue over the forecast period, despite the slowdown in global growth. The domestic outlook is supported by the substantial boost to national income from high commodity prices and growth in private consumption and investment. After slowing in the March quarter in response to the Omicron outbreak, activity is forecast to regain momentum over 2022 as saving and spending patterns continue to normalise and a further tightening in the labour market supports real household income. Growth is then forecast to moderate in 2023 as extraordinary policy support is withdrawn, rising prices weigh on real income and consumption growth slows to more typical rates. GDP is forecast to grow by 4¼ per cent over 2022, and by 2 per cent over 2023. Consumer price inflation in Australia has picked up markedly since the middle of 2021 and the outlook for inflation has again been revised higher. Headline inflation is forecast to peak around 6 per cent in the second half of this year.
Underlying inflation has also risen strongly and is forecast to increase further to 4¾ per cent in the second half of 2022, largely reflecting further pass-through of upstream cost pressures. As some of the current cost pressures reflect supply bottlenecks domestically and abroad and are likely to moderate over time, headline and underlying inflation are forecast to return to the top of the 2 to 3 per cent target range by the end of the forecast period. Higher labour costs in response to a tight labour market are expected to become the primary driver of inflation outcomes later in the forecast period (which is up to June 2024). Key sources of uncertainty for the domestic outlook include the future evolution of COVID-19, changes in price- and wage-setting behaviour at historically low levels of unemployment, and the response of households, firms and asset prices to higher inflation and interest rates.”
Since getting inflation so horribly wrong, the RBA have gone to the no-no closet of economic management and pulled out its big bludgeoning and blunt monetary sword used to increase interest rates, quite escalated rises after almost a decade of dormant interest rates. Monetary policy should not be resorted to at the best of times, let alone when Australia, indeed much of the world, is facing supply side economic inflation. I wrote about our inflation problems in ‘The inflation we did not need to have‘, in which I not only identified how Australia’s inflation problems were foreseeable, but also how this inflation should be addressed.
Former IMF chief economist Maurice Obstfeld worries central banks are playing catch-up after delaying rate rises too long. The aggressive but uncoordinated action by central banks worries former IMF chief economist Maurice Obstfeld, who says there is a real risk that they take rates too high while trying to fight inflation. He warns excessively fast rate rises across the globe could trigger a major economic downturn like that seen in the 1980s:
“You’ve got a real cocktail of global monetary contraction that could go a bit too far because each central bank is looking only at its own domestic situation and not thinking about the global effects.”
Professor Obstfeld, who teaches economics at the University of California Berkeley, told the ABC’s The Business program:
“The dollar appreciated to stratospheric heights [and] depreciations that US trade partners experienced hampered their efforts to disinflation, so they raised interest rates probably more than they would have otherwise. And so we got a very deep global recession which spilled over to emerging markets in the form of the debt crisis of the 1980s and I think there is a risk of something similar now.” He believes central banks waited too long to lift interest rates and are now panicking, trying to catch up. “They have egg on their face from having been behind the curve, and there is a little bit of a sense of panic in the air,” he said. “A great example is your RBA: two back-to-back 50-basis-point increases when inflation is between 5 and 6 per cent. “Now, governor [Philip] Lowe is predicting that inflation, notwithstanding those rate increases, will reach the 7 per cent level. [Federal Reserve chair] Jay Powell would be very happy to have 7 per cent at this point.”
So that leads us all the way back to crowding caused by the cost of interest payments on national debt pushing out of the way other government funded schemes, such as Medicare. Indeed, Dr. Chalmers warned the country the immensely high national debt of $1T could result in crowding where interest rate payments would usurp the costs of Medicare. Now we are witnessing escalating inflation around the world, and declining GDP. An economic recession because of central banks trying to save face over the escalating inflation by increasing interest rates too much and too quickly may well pull the world into an economic recession, and if doesn’t economic growth may well decline considerably everywhere, including Australia.
The threat of Australia’s national debt (where did that money go to, Scott, Josh, Angus, Peter and Barnaby?) interest payments crowding out other government schemes like Medicare or even aged care are a risk the new Albanese government has to consider after it has just paid out further disaster relief compensation. Indeed, regarding the impact of the economic cost of climate change on Australia, the potential damages at current global emissions patterns are conservatively quantified as $584.5B by 2030. (Source: Melbourne University, Melbourne Sustainable Society Institute and Australian National University paper May 2021, ‘Australia’s Clean Economy Future: Costs and Benefits). So the bad news is between now and 2030 a conservative figure of $70B a year may be needed to be spent by our Federal Government in climate change compensation payments, and there still are the costs of the additional infrastructure to change to a clean economy.
So with all these economic pressures to contend with, you could forgive the Albanese government for wishing to restrain our national debt, fix the budget, and carefully consider the extension of the Covid leave payments. The Albanese government did not create these difficult economic challenges, and great care must be taken to improve our financial position as a country whilst we still look to restore funding to aged care, the NDIS, tertiary education, Medicare and the ABC. National Cabinet is meeting on 16 July 2022. What can be done will be done regarding leave payments. The mainstream and social media commentators just need to allow a government of seven weeks since being sworn in time to examine the big picture of all of Australia’s needs.
Like what we do at The AIMN?
You’ll like it even more knowing that your donation will help us to keep up the good fight.
Chuck in a few bucks and see just how far it goes!
Your contribution to help with the running costs of this site will be gratefully accepted.
You can donate through PayPal or credit card via the button below, or donate via bank transfer: BSB: 062500; A/c no: 10495969